By Jeremy Gaunt, European Investment Correspondent
LONDON (Reuters) - Emerging market and Japanese shares fell sharply on Tuesday after an overnight sell off on Wall Street, but the retreat failed to boost the dollar which fell after the previous sessions' gains.
European stocks made modest gains at the open, bucking the overall trend.
Investors are becoming jittery about both the extent of this year's global equity rally -- stocks have risen as much as 75 percent from a March low -- and over the knowledge that authorities will eventually withdraw stimulus measures that have been a key factor in driving a global recovery.
The Wall Street sell off on Monday, for example, was prompted by fears U.S. lawmakers may let a federal home buyer tax credit expire.
The Chicago Board Options Exchange Volatility Index .VIX, investors' favorite barometer of investor sentiment, shot up to its highest level in four weeks, indicating worries about future losses.
This sentiment swept over into Tuesday trading with MSCI's all-country world stocks index .MIWD00000PUS down 0.5 percent, its emerging market sub-index .MSCIEF down 1.3 percent and Japan's Nikkei .N225 closing down 1.45 percent.
"If you look at where markets have risen in recent months, possibly some sort of correction has become inevitable," said Juliam Mayo, investment director at Charlemagne Capital.
Europe was different, partly as a result of oil heavyweight BP's (BP.L) third-quarter results beating forecasts.
The pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.2 percent.
WEAKER DOLLAR
The dollar weakened against a basket of major currencies despite the fall in stocks, which in recent months has tended to boost the currency.
It was partly a reaction to sharp gains on Monday, when the euro had its steepest drop since early August, falling nearly 1 percent, and the dollar index posted its best daily gain since September.
The dollar index .DXY, a measure of the greenback's performance against six other major currencies, fell 0.2 percent to 75.943, but above a 14-month low of 74.94 set last week.
The euro was flat at $1.4877 and the dollar fell 0.4 percent to 91.85 yen.
Demand for euro zone government bonds rose with the two-year yield falling 6 basis points to 1.342 percent.
